When you own a home, you have equity in that property. You can access this equity by taking out a loan against the value of your home. There are three main ways to do this: a reverse mortgage, a home equity loan, or a cash-out refinance. So, which one is right for you?
A reverse mortgage is a loan that allows you to access up to 55% of the equity in your home. The loan is repaid when the house is sold or the last borrower moves out of the house or passes away.
With a reverse mortgage, you don’t have to make any monthly mortgage payments on the loan, and you get to live in the home. Reverse mortgages can be a great option if you want to stay in your home and take out the money upfront or in regularly scheduled monthly or quarterly deposits. They can also be an excellent way to get tax-free cash if you are a Canadian homeowner age 55 years or older. However, reverse mortgages have higher interest rates than conventional mortgages and home equity lines of credit, without any income or credit requirements.
Home Equity Loan
A home equity loan is a second mortgage on your home. You borrow a lump sum of money and then make monthly payments to repay the loan over five to 10 years.
Home equity loans can have fixed interest rates, so your payments can stay the same for the life of the loan. Home equity loans can be a great option if you need a large amount of money all at once and plan to pay it back over a short period. However, home equity loans can be expensive, and you could lose your home if you fall behind on your payments.
A cash-out refinance is a new first mortgage loan that pays off your existing mortgage and gives you cash to use as you need. With a cash-out refinance, you can borrow up to 80% of the value of your home.
The interest rate on a cash-out refinance is usually lower than the interest rate on a home equity loan, and monthly mortgage payments are required. However, you will have to pay closing costs on a cash-out refinance. Cash-out can be a great option if you need a large amount of money and want lower monthly payments.
The Bottom Line
Reverse mortgages can be a great option if you want to stay in your home and avoid making monthly mortgage payments. Home equity loans can be a great option if you need a large amount of money all at once and can afford the monthly payments. Lastly, cash-out refinances can be a great option if you want lower monthly payments and can pay closing costs.
Reverse mortgages, home equity loans, and cash-out refinances are all ways to access the equity in your home without selling or downsizing. All three options come at a premium and can be more costly than conventional mortgages and home equity lines of credit. Each has advantages and disadvantages, so depending on your appetite to make monthly mortgage payments, the importance of staying in your home, and the amount of money you would like to borrow, each option should be carefully considered to see which one works for you.
So, which one is right for you? The answer depends on your needs and financial situation. You can speak with a financial professional to find out which option is best for you.